Proposed sustainability board could be key for ESG reporting: Fitch

It took decades to standardize accounting rules, but widely accepted sustainability standards should come much faster in comparison if efforts to create a new global standards setter come to fruition, says Fitch Ratings.

In a research note, the rating agency said that the proposed creation of the International Sustainability Standards Board (ISSB) could enable the adoption of a globally accepted framework for disclosing material sustainability information by companies generally, and financial institutions in particular.

The International Financial Reporting Standards (IFRS) Foundation, which oversees global accounting standards, has proposed the creation of the ISSB, expected to launch at the United Nations’ next global climate summit in November (with Canada seeking to be named the organization’s headquarters).

This represents a “significant event that could facilitate widespread and consistent sustainability disclosures across sectors,” Fitch said.

Currently, a lack of standardized ESG data and disclosure is seen as a critical issue for investors.

“The sustainability standards will aim to capture financially material information about companies’ sustainability-related risks and opportunities, and their impact on enterprise value, with an initial focus on climate-related risks,” Fitch said.

However, the ultimate efficacy of these standards will depend on their final content — and the extent to which they are adopted, the rating agency suggested.

While the concept of the ISSB has been widely endorsed by governments and regulators, “there are important uncertainties around adoption and adherence prospects, particularly relating to different definitions of sustainability in different jurisdictions,” Fitch noted.

It expects to see greater clarity emerge, “as technical work around sustainability standard-setting begins in 2022.”

“If embraced globally, ISSB could make sustainability standards less complex and speed up the adoption of sustainability reporting by corporates, financial institutions and other entities,” Fitch added.

In particular, “Uniform and comprehensive sustainability data based on a common standard can enhance understanding of the interaction between financial and sustainability factors, and their effect on the integrity of assets and earnings across sectors. This will be especially so if ISSB disclosures become mandatory in national jurisdictions,” the rating agency added.

There have already been a number of efforts to create ESG reporting standards, Fitch said, but it believes that the proposed ISSB “could rapidly become the dominant standard setter,” building on the work of existing efforts in this area.

The initiative is also supported by the “sense of urgency around coherent sustainability standards, particularly regarding climate change,” Fitch noted.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.